Playing Devil's Advocate: an experiment to test the strength of my personal opinion on Speculation

(let me first caution that at the genesis of this exercise, I personally did not agree with the policy of speculation in markets. I saw its harmful effects and personally believed it should be outlawed. However, in the interests of academia, I decided to play Devil's advocate in this case and write this piece to try to rationalize why the proponents of Speculation feel the way they do. I then formed my own opinion on the topic after this analysis. I hope you enjoy it)

"Speculation is an evil pastime for wealthy playboys. It destabilizes prices and misallocates resources, and it should be made illegal."

I fervently disagree with the above declaration about Speculation. My answer will take the form of systematically breaking down each part of the statement and showing it as false and finally summing up my position and offering a closing reflection on why I disagree with it entirely. Firstly, to elucidate my position, let me start by defining Speculation. Speculation relates to the action of investing in a stock which has a very high possibility of losing its value but also has the possibility of returning an exceptionally high return (high risk). Investor’s interested in Speculation are likely basing this position off future price fluctuations and they are usually short-term investors.

Firstly, the assumption that it is the malicious hobby of “wealthy playboys” could not be further from the truth. With the advent of the age of information, the volume of investors in stocks has exponentially grown. Compound this further by the fact that apps such as Etoro and Trading 212 have been introduced for retail traders making trading the stock market an easy process. According to a Pew Research study in 2020, “a majority (52%) have some level of investment in the market” and this is further developed by the fact that even among those with annual family incomes of less than $35,000, about one-in-five have assets in the stock market.” Therefore, the fact that speculation is a large part of stock market investing and all social demographics engage in it means that to say that speculation is merely the hobby of “wealthy playboys” is nothing short of mistruth.

Similarly, the claim that it destabilizes prices is, in my view, also wholly untrue. The stock price is, by definition, meant to represent the view of all available indicators of a firm. If a speculator expects the price to fluctuate then this surely is representative of a portion of the market view. According to “The importance of market speculation, and its economic benefit” by Uma Shashikant “The presence of multiple players acting on various pieces of information makes the market efficient”. There are no concrete guarantees as to the success of a firm, so the sceptical nature of speculators surely provides a valuable insight into the market true view of a firm’s value.

The adjudication that speculation leads to a misallocation of resources is similarly unfounded. Firms make their guesses based on scores of relevant factors ranging from stock price, macroeconomic factors, microeconomic factors, political factors and HR. Therefore, the claim that speculation alone would lead to the misallocation of resources is a very naïve view to take of a firm’s decision-making abilities. Especially for a firm large enough to float of a stock exchange or alternative investment market.

Finally, my last point steadfastly opposes the claims in the question that it should be made illegal. My position on why it should not be made illegal relates to a brief critique on regulation. I advocate for a libertarian view to be adopted in relation to the regulation of markets. If we outlaw an activity because it could be unprofitable it acts as a means of punishing successful speculators. Furthermore, according to famed researcher Button, it acts as an incentive to enable the unwise investor to merely seek out another form of unprofitable investment (assuming he/she doesn’t merely get lucky) and thus not actually solve the problem at all but force it into another arena. “But the main arguments against excessive government regulation, and there is a balance, involve two key findings of behavioural economists…the importance of inertia in human behaviour". The world is not static and as circumstances change, so there is a need to change regulations. But regulators are a little like generals, they are usually trying to win the last war".

As can be seen from the above piece, while the unwise investor will waste his money on something else, so too will the malevolent speculator seek to find a new source of misadventure. The time and resources of regulators should be more focused on the salient issues of financial crime and malpractice and police the area of speculation rather than completely outlawing it.

The success of the investor should be entirely in their hands based on the egalitarian means of the fluctuation of the stock market. If we trust the rules of finance, then we must trust those to follow them and not intervene carelessly.

I finish with a note that to punish the masses for the folly of a few would be to destroy what makes finance a beautiful field, and that is that it is a survival of the fittest in its truest sense.

So in conclusion, I believe that this exercise provided me with an invaluable effort to try to holistically appraise a contested topic and come to my own decision. While I have a newfound appreciation for the proponents of Speculation, my opinion remains undeterred and I am now more confident in it than ever. I see that the arguments for speculation can be decomposed sand in some cases empirically disproven. With that said, this was a fantastic opportunity for growth and the development of my academic and logical reasoning. I feel more confident tackling contentious issues after performing this exercise.

I truly hope that those of you reading this can lift some of the same benefits in your own relevant courses of study!